There are strong institutional and fiscal safeguards in place to prevent lower returns from Singapore's government-owned investment entities from weighing on its sovereign credit profile.
But should the current weak investment climate drag on, a slowdown in the Singapore economy could weigh on the country's credit rating, said credit-rating agency Moody's in a report on Wednesday.
"Over time, meaningfully lower returns (from these investment entities) could curb fiscal space, and limit the possibility of fiscal stimulus. That could be particularly relevant if domestic growth were to cool.
"In turn, a slowdown in growth to levels that are no longer consistent with Aaa-rated peers would present credit-negative pressures for Singapore," said the report.
The report was addressing concerns over how weaker investment returns from Singapore's sovereign wealth fund GIC, state investor Temasek Holdings and central bank the Monetary Authority of Singapore (MAS) could weigh on Singapore's sovereign credit profile.
This is because long-term expected returns from these three entities form part of the net investment returns contribution (NIRC) portion of the fiscal budget. At a historic high of S$14.7 billion in FY16, NIRC is the single largest revenue contributor to the government's coffers.
Moody's currently rates Singapore's sovereign profile and Temasek Holdings as Aaa with a stable outlook. GIC is unrated. But in recent weeks, GIC and Temasek representatives have said that the current low-growth, low-inflation and low-interest-rate environment has hit their portfolios. They also expect lower returns in the years to come.
Moody's concerns echo those made by economists recently interviewed by The Business Times. Questions were also raised in Parliament this week. On Wednesday, Moody's report gave clear estimates on how a noticeably lower NIRC can affect the fiscal position.
Its calculation "suggests that if budgeted NIRC for fiscal 2016 were to halve, fiscal slippage would be close to two percentage points, resulting in a deficit of one per cent of GDP instead of the budgeted surplus of 0.8 per cent", said the report.
But while the scenario underscores the importance of NIRC to government coffers, Moody's stressed that it is not its baseline assessment.
Instead, the agency sees no immediate cause for concern.
"Over the near to medium term, conservative spending rules, a large stockpile of existing fiscal reserves, and features of Singapore's fiscal framework that work to safeguard them will limit the negative credit impact on the sovereign".
This is in contrast to other sovereigns like Norway and those in the Gulf Cooperation Council, noting that their reliance on oil-related revenues in the current oil price rout would eat into fiscal space.
Rules for withdrawals from funds in these countries also appear less well defined.
For this fiscal year, at least, Moody's perceives that NIRC estimates have factored in several global factors. These include negative interest rates, a slowdown in China, and lacklustre growth.
On the other hand, the United Kingdom's surprise vote to leave the European Union, or "Brexit", is likely to have been left out of these estimates, said Moody's.
But while it does not "consider one-off fiscal slippages . . . to be credit negative", should lower returns from GIC, Temasek and MAS result in persistent fiscal deficits, creation of debt, or erosion of reserves, Moody's assessment would turn negative.
This can be exacerbated by a noticeable slowdown in the economic growth of Singapore, as the space for fiscal stimulus shrinks. Said the report: "If low returns were to persist, they would weigh on budgetary balances, and limit scope for future fiscal stimulus to boost growth."
This article was first published on Aug 18, 2016.
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